Simplifying Fund Selection With All-In-One Portfolios
With the robust growth in the number of ETFs in recent years and the thousands of mutual funds available, crafting or refining a portfolio of funds is tougher than ever. Research and portfolio tools—such as fund screeners, comparison tools and, of course, Schwab’s Mutual Fund OneSource Select List®—can certainly simplify the process. But many investors are seeking an even simpler solution. One answer: an all-in-one portfolio that pairs professional management with asset-class diversification in one convenient package.
But as with individual ETFs and mutual funds, all-in-one portfolios come in several varieties, and investors still must choose among the alternatives, which include target-date funds, asset-allocation funds and managed funds. Although they share some characteristics, there are also important differences among them—such as how they’re constructed and whether their allocations change over time—that can have significant impacts on performance and risk. Before pursuing an all-in-one solution, investors need a clear understanding of the alternatives and how they align with their investment goals and risk tolerance.
Also known as “lifecycle” or "age-based" funds, target-date funds contain a mix of assets—stocks, bonds and cash. They focus on a future targeted date, gradually shifting their allocation from more aggressive (stocks) to more conservative (bonds and cash) as that target date approaches. Although they're most frequently used in the context of retirement, they can also be appropriate when targeting other key financial goals, such as funding a future college education.
Most target-date funds take a "fund of funds" approach: Fund managers select a variety of underlying funds, often within a single fund family, that meet their asset-allocation objectives and desired investment style. Some use index funds as their underlying investments, others use actively managed funds; in those cases, the day-to-day investment decisions are left to the managers of the underlying funds, with the overall fund manager monitoring for overlap, rebalancing as needed and adjusting the fund's asset allocation as the target date nears.
Like target-date funds, asset-allocation funds are also multi-asset funds, and often funds-of-funds, but their allocation is maintained within a predetermined range, so their risk profile doesn't vary over time. They are defined by their level of risk: conservative, moderate or aggressive. As with any asset allocation, specific factors determine whom they're appropriate for: the age, risk tolerance and time horizon of the investor, in conjunction with the investment objective of the fund. Asset-allocation funds can make sense for investors who expect their appetite for risk to remain steady for a foreseeable timeframe—such as an aggressive young investor just getting started or a recent retiree shifting to a conservative allocation.
Managed Mutual Fund Portfolios
Another alternative, for investors looking for a single-solution portfolio more tailored to their specific situation, is a "managed portfolio" or "managed account." Initially designed for institutional investors and high-net-worth individuals but now more widely available, these accounts comprise diversified, actively managed portfolios of mutual funds tailored to a specific risk profile. Once established, their allocation generally remains constant over time, but they are monitored on an ongoing basis and adjusted or rebalanced as appropriate. They can also have more leeway in terms of underlying fund choices, incorporating funds run by experts in their respective asset classes or areas of specialization.
Evaluating the Alternatives
When evaluating and comparing alternative all-in-one portfolios, here are a few things to keep in mind:
- When you're comparing past performance of multiple funds, check to see that their asset allocations are similar, because market conditions will impact performance. In a period of rising equity markets, for instance, it's likely that funds with higher allocations to stocks will outperform those with lower allocations.
- Even within a similar category—such as "moderate allocation funds"—funds can vary widely in their asset breakdowns. So whereas one such fund might allocate 30% to stocks, another might go significantly higher. Because, generally, the greater the stock allocation, the higher the risk, make sure that any fund you select is aligned with your risk tolerance.
- Although most all-in-one portfolios are designed to be stand-alone solutions, many investors use them in conjunction with other investments. If that's the case, understand that by combining an all-in-one fund with one or more other funds, you may be drastically altering your overall portfolio's risk level.
- Watch your expenses. Expense ratios have been trending downward in recent years, so it shouldn't be difficult to find suitable all-in-one funds with expense ratios under 1%.
The Schwab Mutual Fund OneSource Select List features both asset-allocation and target-date funds, listed under "Additional Fund Categories." Morningstar categories provide information about each fund's style or emphasis, and, as with all funds on the Select List, risk level is indicated.
Schwab Can Help
Schwab offers several tools and products to help investors who have neither the time nor the inclination to delve into the overwhelming array of mutual funds available. One, the Schwab Mutual Fund Portfolio Builder TM, provides investors the ability to allocate an initial investment across a diversified model portfolio comprising four to five mutual funds that are selected based on the investor's risk tolerance. Investors can choose from two variations: a blend of Schwab and third-party funds, or all third-party funds (chosen from the Select List).
Schwab also offers Schwab Managed PortfoliosTM–Mutual Funds. Each constitutes a diversified portfolio of mutual funds, carefully selected from Schwab's Mutual Fund OneSource® service, focused on a particular strategy or risk tolerance. Actively managed by professionals from Charles Schwab Investment Advisory, Inc., each portfolio provides a strategic balance of exposure to various asset classes while managing risk, offering investors access to Schwab's professional advice at a competitive cost.
Investing for the Long Haul
One more advantage of an all-in-one portfolio is the ease of ongoing investing. Instead of having to allocate new money across multiple funds, or make decisions about where you want your contributions applied, additions to all-in-one funds allocate themselves. Combine this with Schwab's Automatic Investment Plan (AIP), where you specify how much you want to invest and at what interval, along with your funding source, and you're set. Regular investments can be as little as $100 per month, and all Schwab Funds and funds appearing in the Select List are eligible.
Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling 800-515-2157. Please read the prospectus carefully before investing.
Investment value will fluctuate, and shares, when redeemed, may be worth more or less than original cost.
Diversification strategies do not assure a profit and do not protect against losses in declining markets.
Periodic investment plans (dollar-cost-averaging) do not ensure a profit and do not protect against loss in declining markets.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions.
The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.
Schwab's short-term redemption fee of $49.95 will be charged on redemption of funds purchased through Schwab's Mutual Fund OneSource® service (and certain other funds with no transaction fee) and held for 90 days or less. Schwab reserves the right to exempt certain funds from this fee, including Schwab Funds,® which may charge a separate redemption fee, and funds that accommodate short-term trading. For each of these trade orders placed through a broker, a $25 service charge applies. Funds are also subject to management fees and expenses. Charles Schwab & Co., Inc., member of SIPC, receives remuneration from fund companies for record keeping, shareholder services, and other administrative services for shares purchased through its Mutual Fund OneSource service. Schwab also may receive remuneration from transaction fee fund companies for certain administrative services.